7 stocks that offer safe dividend growth

  • By Lawrence C. Strauss,
  • Barron's
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Dividend investing often involves a trade-off between stocks that offer higher yields and those that sport better growth, as this column has noted previously.

The higher yielders tend to grow their payouts at a slower clip, and the faster growers often have smaller yields.

The stocks in the accompanying table lean toward stocks in the latter category. Five of the companies are yielding 1.5% or less, well below the S&P 500’s (.SPX) average of about 2.1%.

The good news is that all seven of these firms sit at the top of Reality Shares’ latest annual ranking for dividend safety. In fact, they have all earned that distinction for four straight years back to when the ranking was launched.

Reality Shares, an index provider, ranks dividend safety based on several criteria, including expected dividend growth over the next 12 months, earnings-per-share growth, and dividend actions over the previous five years. The firm ranks a company’s ability to increase or decrease its dividend over the next 12 months.

Of course, safe dividends don’t always translate into good stock performance, though they often signal sound underlying financial health. Texas Instruments (TXN) is the only stock among in this group that’s had a negative total return over the past year. It’s off 11.6%, including dividends, amid concerns about slowing economic growth.

But the stock offers the highest yield in the group at 3.3%. The company specializes in making analog semiconductors that are used in factories and automobiles, among other markets. It has made buybacks and dividends a major priority over the years.

Analysts are projecting that its 2018 payout ratio–dividends as a percentage of earnings–will be about 47%, according to FactSet. The company is scheduled to release its fourth-quarter and 2018 financial results on Jan. 23.

The other relatively high yielder on the list is Starbucks (SBUX). It’s at 2.3%. The consensus EPS forecast for this fiscal year, which ends in September, is $2.65, up from $2.42, previously. Last year the company hiked its quarterly dividend by 20% to 36 cents a share from 30 cents.

Under CEO Kevin Johnson, who succeeded Howard Schultz in 2017, the company has scaled back some of its expansion plans, including adding higher-end stores. But Starbucks has the earnings growth and cash flow strength to keep boosting its payout.

For the other five companies on the list, investors aren’t getting big yields. Tractor Supply (TSCO), a retailer that sells farm and ranch products such as fuel pumps and fishing reels, is at 1.5%. All of the others are below that, with Visa (V), whose yield was recently at 0.7%, bringing up the rear.

But the payments giant, which has the biggest market cap among these firms at a little above $300 billion, certainly has the financial wherewithal to hike its dividend significantly. Last year Visa’s quarterly disbursement went to 25 cents a share, up from 21 cents, for a 19% increase. It’s expected to earn $5.33 per share this fiscal year, which ends in September, up from $4.61 previously, and $6.21 the following year.

Last fiscal year its payout ratio was 18%, a relatively low level that leaves plenty up flexibility for more hikes.

Three other companies–cosmetics firm Estee Lauder (EL), shipping and logistics outfit Expeditors International of Washington (EXPD), and footwear and apparel giant Nike (NKE)–all had yields of 1.3% recently. That’s not great, but their dividends should grow over time thanks to solid earnings growth and cash-flow generation.

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